TTM Technologies Inc (TTMI) 2009 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by.

Welcome to the TTM Technologies second quarter 2009 financial results conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions).

As a reminder, this conference is being recorded today, Wednesday, July 29, 2009.

I would now like to turn the conference over to Kent Alder, Chief Executive Officer.

Please go ahead, sir.

Good afternoon and thanks for joining us for our 2009 second-quarter conference call.

Joining me on today's call is TTM's CFO, Steve Richards.

I will begin with a review of the business, and Steve will review our financial performance.

Then we'll open up the calls to your questions.

Before we get into any detail, let me mention that during the course of this call we will make forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to fluctuations in quarterly and annual operating results, the volatility and cyclicality of various industries that the company serves, and the impact of the current economic crisis, and other risks described in TTM's most recent SEC filings.

The company assumes no obligation to update the information provided in this conference call.

We will also present non-GAAP financial information in the call.

For a reconciliation of our non-GAAP financial information to the equivalent measures under GAAP, please refer to our press release which we filed with the SEC and is posted on our website.

Today we announced our results for the second quarter of 2009.

Our revenue of $144.5 million was on target with our forecast.

And our earnings of $0.14 per share were at the high end of our guidance range.

It is also positive to note that we experienced some renewed order activity from our networking customer base and continued strength in our aerospace and defense business.

Our margins improved as a result of our ongoing cost reductions, the structural changes we have made in the past two quarters and the strategic investments we make as a normal part of our business.

Furthermore, our cash flow remains strong.

We generated $25.5 million in free cash flow during the quarter.

Given the ongoing economic challenges, I am pleased with our performance.

Because of the past actions we have taken, TTM is stronger, more competitive, and better positioned to enhance our performance as the market improves.

Now let me provide a quick overview of the results for the quarter.

Our printed circuit board manufacturing segment recorded second-quarter net sales of $122.6 million compared with $132.3 million in the first quarter.

The decrease was mainly due to continued weakness with our commercial customers.

Second-quarter operating segment income was $10.7 million compared to $4.4 million in the first quarter.

We recorded asset impairment and restructuring charges of $48,000 in the second quarter and $2.8 million in the first quarter, related to the closure of our Redmond, Washington facility.

Excluding these charges, operating segment income for the PCB manufacturing segment was $10.7 million, and for the second quarter compared with $7.2 million for the first quarter.

On a sequential basis, average price per panel increased roughly 2% due primarily to a continued shift toward higher technology products.

Overall, market pricing remained fairly stable with some random price competition.

For the backplane assembly segment, second-quarter net sales were $29.1 million compared with $24.9 million in the first quarter, driven primarily by stronger sales at our Shanghai operation.

Second-quarter operating segment income was $2.3 million compared to first-quarter operating segment income of $1.5 million.

Now let's look at our four end markets.

Overall, we continue to see stable demand in aerospace and defense, and some signs of improvement in network and communications.

Demand from our computing and medical, industrial, instrumentation customers remains soft due to weak economic conditions.

The aerospace/defense end market was flat as a percentage of sales at 45% and down slightly in absolute dollars compared to the prior quarter, primarily due to continued softness with commercial aerospace customers.

We remain confident that our broad program involvement and market leadership in this end market will continue to provide steady order flow through the rest of the year.

One large order worth mentioning is the [third] release we received in June from BAE for their Thermal Weapons Site program.

As you may recall, we began this program in June of 2008, and it has continued to be a major success for us.

The recent follow-on order was over $7 million and is scheduled to ship through the first quarter of 2010.

Total orders on this program now exceed $23 million.

The computing storage peripheral end market decreased from 12% of sales in the first quarter to 10% of sales in the second quarter, reflecting continued weakness in IT spending.

The medical, industrial, instrumentation end markets decreased slightly to 9% of net sales this quarter, which is down from 10% in the prior quarter.

The decrease was primarily due to weaker sales to instrumentation customers.

Network and communication end market increased in terms of dollars and as a percentage of sales, improving to 36% net sales from 33% in the prior quarter.

As expected, the increase was largely due to our Chinese customer base, which has benefited from 3G infrastructure spending in China, as well as a slight increase in shipments from our North American backplane operations.

Our top five customers comprised 37% of second-quarter net sales and represented a strategic mix of commercial and aerospace/defense customers.

Only one OEM customer represented more than 10% of sales for the quarter.

In alphabetical order, our top five OEM customers in the second quarter were Cisco, Huawei, ITT, Northrop Grumman, and Raytheon.

Lead times were stable quarter over quarter.

Lead times for our commercial customers range from three to five weeks while lead times in our aerospace and defense facilities are generally at five to eight weeks.

Lead times for some of our high-tech specialized aerospace/defense products are 14 to 20 weeks.

At the end of June, our printed circuit board book to bill ratio was 1.06, up from 0.98 at the end of the first quarter.

As a reference point, the IPC book to bill average at the end of June was 1.12, which was the fifth consecutive monthly increase, a positive indication of some improvements in the market.

On a year-to-date basis, IP shipments are down 29% while TTM shipments are only down 14% in our printed circuit board segment.

Now Steve will review the financial performance for the quarter and discuss our outlook for the second quarter.

Thanks Kent and good afternoon everyone.

As Kent noted, we continued to execute well, despite a challenging business environment, and our operating results for the second quarter of 2009 were in line with our guidance.

Before I begin, I want to point out that I will be discussing our results on a GAAP and a non-GAAP basis.

As we explained on our last call, we believe that providing both calculations, both non-GAAP and GAAP, gives our investors a more accurate view of our business.

With that, let's turn to the financial results.

Second-quarter net sales of $144.5 million decreased $4.5 million or 3% from first-quarter net sales of $149.0 million, due primarily to weakness in the commercial sector.

Gross margin for the quarter of 18.7% increased from first-quarter gross margin of 16.3%.

Selling and marketing expense for the second quarter was $6.3 million or 4.4% of net sales as compared to first-quarter selling and marketing expense of $7.2 million or 4.8% of net sales.

Second-quarter G&A expense, including amortization of intangibles, was $8.5 million or 5.9% of net sales.

First-quarter G&A expense, including amortization of intangibles, was $9.3 million or 6.2% of net sales.

As you will recall, first-quarter G&A expense included the cost of our year-end financial statement audit.

In the second quarter, we recorded stock-based compensation expense of $1.6 million, which is unchanged from the first quarter.

64% of the expense was recorded in G&A, 27% in cost of goods sold, and 9% in selling and marketing.

During the second quarter, we recorded restructuring charges totaling $48,000 related to the closure of our Redmond, Washington facility.

Operating income for the second quarter was $12.2 million compared to operating income of $5 million for the first quarter.

Second-quarter interest expense, which includes amortization of deferred financing costs, was $2.8 million.

As we discussed last quarter, we have adopted FASB Staff Position APB 14-1, which increases the interest expense on our outstanding convertible debt.

The adoption of APB 14-1 resulted in a noncash increase in interest expense of $1.4 million for the second quarter and is expected to result in increased interest expense of approximately $5.5 million for full-year 2009.

First-quarter interest expense was $2.7 million.

Second-quarter interest income was $61,000 as compared to first-quarter interest income of $99,000.

Second-quarter other net income was $147,000.

This compares to first-quarter other net expense of $108,000.

This consists primarily of foreign currency translation adjustments for our Shanghai operation.

Our effective tax rate in the second quarter was 38.2% compared with 38.2% in the first quarter.

Net income for the second quarter was $5.9 million or $0.14 per diluted share compared to first-quarter net income of $1.4 million or $0.03 per diluted share.

Second-quarter non-GAAP net income was $8.3 million or $0.19 per diluted share.

This compares to first-quarter non-GAAP net income of $5.5 million or $0.13 per diluted share.

Non-GAAP net income excludes amortization of intangibles, stock-based compensation expense, noncash convertible debt interest expense, asset impairment expense, and restructuring charges as well as the income tax effects related to these expenses.

Adjusted EBITDA, which excludes asset impairment charges, for the second quarter was $18.3 million or 12.6% of net sales compared with first-quarter adjusted EBITDA of $11.1 million or 7.5% of net sales.

Now let's turn to the balance sheet, which remains strong.

We again generated significant cash during the quarter, and we continue to have a manageable debt position.

Cash and cash equivalents and short-term investments at the end of the second quarter totaled $189.4 million, an increase of $25.2 million from $164.2 million at the end of the first quarter.

The balance in short-term investments decreased due to further collections of $900,000 from our investment in the reserve primary fund.

Of the $20.1 million that we invested in this fund as of September 15, 2008, to date we've received back $18.1 million.

Cash flow from operations in the second quarter was $27.3 million due to both solid cash earnings and a reduction in working capital.

Net capital expenditures for the quarter were approximately $1.8 million and depreciation was $5 million.

Looking ahead to the third quarter of 2009, we expect revenue in a range of $134 million to $142 million.

We expect GAAP earnings in a range from $0.09 to $0.15 per diluted share and non-GAAP earnings in a range from $0.14 to $0.20 per diluted share.

Gross margin percentage is expected to be in a range from 18% to 20%.

Non-GAAP gross margin should be in the same range since almost none of our add-backs are in cost of goods sold.

We expect that selling and marketing expense will be approximately 4.6% of revenue, and G&A expense, including amortization of intangibles, will be about 6.2% of revenue.

We expect our tax rate to be approximately 38%.

As a result of the adoption of APB 14-1, we will record an additional noncash interest expense of about $1.4 million or about $0.03 per diluted share in the third quarter.

As a reminder, our $175 million convertible debt bears interest at 3.25% per year or about $1.4 million per quarter.

With that, let's open the call to your questions.

(Operator Instructions) Matt Sheerin, Thomas Weisel Partners.

This is actually Alberto Mann calling in for Matt.

I guess the first question is on the PCB segment.

Sales were down sequentially, but the operating margin was up significantly.

Can you help us reconcile what changes went on there?

Was that mix or was there something else going on?

Yes.

Good afternoon, Alberto.

Basically the biggest difference there, as we indicated in our first-quarter call, was the closure of the Redmond plant and the resulting $5 million per quarter savings in labor expense.

That also had to do with some other layoffs we did in January as well.

But mix was pretty stable.

The results were I think in line with what we expected to see.

But the biggest single factor in improving margin was effectively the Redmond closer as well as the fact that we got about $7.1 million of sales from the Redmond plant, from those customers, in our other facilities, which improved utilization during the second quarter at those facilities.

Okay.

And just looking at the guidance, you said your book to bill was over 1; the industry is even higher than you are.

Maybe you can discuss that delta.

But the guidance you gave was for a down sequential quarter.

Can you help us understand why it's going to be down?

And then maybe looking at it by the various end markets?

Yes, sure.

I think some of the book to bill numbers get a little bit skewed when we have a significant booking that doesn't ship in the immediate quarter following the booking.

So the timing of when we book and when we ship doesn't quite match up to the booking and the billing.

For instance, we had some pretty sizable bookings this past quarter, but they will be shipping through the first quarter of 2010, so you have that phenomenon going on.

I think relative to our 1.06 book to bill ratio for TTM compared to the industry at 1.12, we have a significant portion of aerospace and defense business that is more stable.

We have a pretty broad and diverse customer base that I think provides us with some stability that maybe doesn't get reflected in the IPC numbers.

For instance, the IPC year-to-date number I think on shipments are down 29%.

And with TTM, we are down 14%.

So we're down half what the IPC number is.

So when you go down that far, you have some opportunity to go back up a little quicker.

So we're a little more stable.

Don't go through quite the fluctuations up and down.

Then talking about maybe our end markets a little bit, when you look into the third quarter, we think our aerospace and defense business will be pretty stable.

There will be probably some continued softness in the commercial aerospace, but the defense business will be stable for us.

Networking and communications, that business, we are seeing some more activity in the North American customer base.

But the challenge we've got in the next quarter is that the 3G implementation has, at least on the products that we are shipping, is not continuing to progress as it did in this quarter.

So we will be without some shipments from our Shanghai operation in the next quarter that we didn't have this quarter.

And also in -- with our kind of inventory shipment that we had out of our Hayward facility will not repeat during the next quarter.

So when you look at the third quarter versus the second quarter, our backplane work will be down about $6 million and our printed circuit board business will be down $1 million.

So that's kind of where we are forecasting.

So a pretty flat forecast with printed circuit board business.

I might just finish out on the end of market discussion.

We talked about computing, storage, and peripherals.

That will -- it's down this -- down.

Then the next quarter here it -- this quarter.

It could be up in the next quarter just slightly.

The medical, industrial, and instrumentation -- that -- it will probably be flat for the next quarter, maybe down slightly.

But within that segment, the instrumentation is more negatively impacted by kind of the weak economy.

The industrial and industrial controls business, we've seen some pretty nice orders in that segment.

But for the segment overall, when you combine it, it will be maybe down slightly but kind of flat in dollars -- maybe down in percentage.

Okay.

Thanks for the color.

And just one quick follow-up.

The China 3G business that you said seems to be falling off a little here after being really strong.

Do you expect that to come back at any point maybe in the fourth quarter?

Or do you not have any visibility into that?

We don't have any visibility, but it did not go to the full extent that we thought it would.

So we're thinking that this is a temporary pause in the 3G activity.

I think that the implementation has gone a little bit slower.

Maybe it takes a little longer to accept that 3G new technology, those kind of things.

So we think there's still upside for us, not quite sure when, so we believe this is a pause in the action.

Okay.

And just the last one is a housekeeping question.

Who was the 10% customer?

The 10% customer was Northrop, Northrop Grumman.

Thanks.

(Operator Instructions).

Rich Kugele, Needham & Company.

Thank you.

Good afternoon.

Two questions.

I guess one on obviously there's been in the news a fair amount of concern about some of the defense programs that the Obama administration is cutting back on.

And we obviously get a number of questions about how that might or might not affect you guys.

And so if you have any comments on the programs you have relative to any potential Pentagon cutbacks?

Yes, sure.

It's clear that the F-22 program, which we are heavily involved in, will probably be coming to an end.

However, we have orders and we are good through 2010 on the F-22.

So that's not an immediate situation.

We are also starting to ramp on the F-35, which is the Joint Strike Fighter.

So there's a ramp on the F-35 and a decline on the F-22.

So there is a transition within our business from F-22 to the F-35.

So as long as the timing happens appropriately, we don't see that there will be any negative impact with the halt of F-22 productions because it will transition to F-35s.

We're involved in a broad array of programs with a significant number of customers.

So one of the challenges is that maybe some of our smaller competitors have, that they are attached to one or two programs.

When those programs come to an end, then they kind of scramble until another program comes along.

But we have programs that are so diverse that we have programs coming and going all the time, so we have a steady flow of programs that allow us to march forward quarter over quarter.

We're also involved in more of the combat type products with roadside bomb detection units.

There's some GPS radio devices that we provide.

So we're involved in all aspects of aerospace and defense.

And if the money transfers to more combat-ready products, I think we are involved in those programs.

And there's a lot of technology that will continue, and as the F-22s decrease, there might be some retrofits on F-16s, so we are involved in all of those programs.

There's some foreign military sales that we have quoted some programs on.

So we're pretty confident in that aerospace and defense business being strong going forward, due to our leadership position and the broad array of programs that we are on.

That's helpful.

Thank you.

And then, Steve, just two quick modeling questions.

Obviously you are able to even in the guidance maintain or even improve the gross margin level despite the lack of seasonal revenue that we would normally expect.

What should we now on the new cost structure expect for gross margins going forward?

And then similarly on the OpEx side, should we assume that this is now the run rate to build off of?

Certainly on the gross margin line, I think that 18% to 20% range for Q3 is a good one to use.

As Kent mentioned, we think most of our revenue softness down towards the midpoint of guidance is going to come from the backplane assembly business, which is somewhat lower-margin business of our two.

So with PCB staying pretty stable quarter over quarter, that helps preserve the margin.

And I think obviously going forward, as revenue picks up, then we just see further absorption.

The cost savings I mentioned earlier from the Redmond closure and the other layoffs, those are with us now for the foreseeable future.

I don't expect us to need to add workers anytime in the near term.

So that kind of -- hopefully we've found kind of a floor of gross margin.

So that will be up a little bit -- 18% to 20% in the next quarter.

In terms of SG&A, we did see some savings this quarter that I'm not sure are going to be something we can stick with.

We had to kind of true-up our sales incentive plan for our sales force this year based on our expectations for the year.

So that gave us some benefit in selling that was one-time in nature.

So I think we are expecting to see that tick up a little bit from the $6.3 million level in Q2 to a little bit higher than that next quarter.

But I think percentage-wise, the numbers I gave in my directions are still pretty good for our overall OpEx numbers.

I don't see it falling more than say 10% below the gross margin line -- 10.0% to 10.5% below the gross margin line for operating margin.

Does that answer your question, Rich?

Yes it did.

Thank you very much.

Shawn Harrison, Longbow Research.

This is Gausia Chowdhury calling on behalf of Shawn.

I got signed out for one second, so I just have a matter of housekeeping.

Sorry if you answered this, but usually you mention your average layer count as well as quick turn sales as a percentage of sales.

Can you please give me that number?

Sure.

Our average layer count hasn't changed much.

In fact, it's (multiple speakers) yes.

It was 13.7% for the second quarter.

Okay.

And our quick turn percent was actually up a bit more from first quarter at 11.5% in the second quarter.

Thank you.

Second, you provided a little bit of commentary about the book to bill ratio with IPC releasing today.

Do you have a number where you might be to date right now in July?

You said it might be down a little bit, but do you have a number where you might be right now?

Are you talking about July year-to-date?

Yes.

Year-to-date July.

Our booking is certainly above 1 in July.

So we continue to book pretty strong through July.

Okay.

All right.

If you could give me -- provide an update on the Chippewa Falls facilities, are you still running on reduced work weeks?

I know that has to due a lot with the communications market, and you mentioned that's kind of slow.

So if you could just provide an update, is that still going on?

Yes.

A good question.

And we -- I mentioned earlier that with our networking, we've had some renewed activity there, and that activity has impacted our -- positively impacted our Chippewa Falls facility.

So we have terminated the furloughs there.

We're back in full production.

And we, as near as we can tell, expect to continue.

Sounds good.

And lastly, just wondering about pricing, if you could elaborate a little bit.

You mentioned that there were some pockets that -- where you saw some competition.

Maybe provide some more commentary please?

Well, our pricing is up 2%.

And as we mentioned, that's directly related to the product mix or the technology.

We are using some exotic materials, some very specialized materials that drive those panel costs up.

So the price increase was all due to product mix and our moving up the technology scale.

We talk about random pricing situations, and it's just that.

They are purely random.

I don't think there's any system that we can see with pricing.

It is purely just a random situation.

And that opposed to us coming out and saying, hey, the market pricing is pretty stable.

It's stable, but there are pockets of -- in situations where pricing is fairly competitive.

Sounds good.

Thank you.

Ryan Jones, RBC Capital Markets.

I was just curious, looks like over the course of the quarter, you were able to generate a significant amount of cash and to where it now represents about 34% of your asset base.

Just curious about uses of cash going forward.

I know acquisition is always kind of lurking in the background, but what about alternatives such as a stock buyback or dividend?

As you mentioned, the most likely usage for our cash is future growth probably through an acquisition.

So we tend to want to keep our cash close and keep it secure.

So we got it invested in pretty conservative investments.

And I think the likelihood of us doing a stock buyback or issuing dividends of our cash in the near term is far less likely than that we put it to use to grow the business.

I think that's really what our shareholders would probably value most.

Okay.

And then any update on the acquisition front?

I think the update is still the same.

We are active and working hard to bring that about.

But to get the right acquisition does take time.

So there's really no change.

All right.

And then a final question.

I was just curious about how much of the 5% decline at the midpoint of your guidance would represent normal seasonality versus maybe other factors, say maybe further macro degradation.

Is there any way to -- after talking to your customers, to kind of put some color behind that?

Yes.

You bring up a good point, that we have some seasonality in the summer.

But it's based around vacations, July 4th holidays and so forth.

So there's no real trends.

And that is a factor as we forecast into the third quarter.

We haven't put our arms around exactly how much of the decrease of $5 million is related to the seasonality.

My sense is just off the top of my head here, it could be at least 50%.

Okay.

Thank you.

Jiwon Lee, Sidoti & Company.

Just a quick question on the raw materials, especially the copper laminate pricing trends for the quarter please compared to a quarter ago?

Basically prices on our raw materials are stable.

We probably will see some slight increases.

No general trends of any price increases.

While there might be some slight increases, we are also working hard to reduce costs on an item by item basis, so nothing of major significance on the material side.

That's helpful.

And then looking back, the second quarter, how has kind of the order trended through the month?

Was it just generally a better month as the quarter went on?

And then looking out July, how should we be thinking about the order trend so far in the third quarter?

Yes, when we look at the quarter, our lowest booking month was April.

It increased in May and increased in June.

And July is still carrying on pretty nicely for us.

I don't think it's quite as strong as June, but it was certainly an adequate month.

So you're expecting some slowdown as the summer progresses, perhaps in August.

That's how we should think about that?

Well, you could say that -- when we talk -- it's kind of all relative too.

You're kind of looking at a book to bill ratio and so forth.

So while July is above 1 on a book to bill ratio, we anticipate that August will be too.

And then when you look at seasonality, July and August are the slowest months in the quarter, and then it picks up again in September.

And so all of this -- the work that we book doesn't necessarily ship in the next quarter.

So if we look at the following quarter -- in July, August, September -- September should be the strongest month.

Okay.

And just kind of going back to your Asian deal front, previously I was under the impression that you guys had a pretty good idea of who you wanted to sort of kind to further discussions.

Are we still there and just looking for better timing?

Or have we pushed that goal a little bit because of the macro factor?

Or just can you help us out a little bit more on this -- your goal for the deal?

The fact of the matter when it comes to acquisitions -- and we've been very active going clear back to 2006 when we started making our first trips into Asia, and we have looked at numerous companies and narrowed that down to a handful of companies we think would be a nice fit for us.

And so we are in the process of continuing discussions.

But it does take some time to put together a deal that would be very, very successful.

And so we are patient and prudent and going to make sure that we get the right situation, and sometimes that takes time.

Excellent.

That's all for me.

Thank you.

We have no further audio questions at this time.

I would like to turn the conference back over to Kent Alder for any closing statements.

Thank you.

I want to make just a -- kind of fill in some blanks around our quick turn and layer count.

And when we look at the quick turn situation now, that seems to be different and has evolved over time.

And our focus is on high technology quick turn where there's more margin.

And as we focused on high technology quick turn, we've made somewhat of a trade-off between technology and quick turn, so we don't think our percentage will be growing or changing much from the 10% to 12% to 13% range.

Layer count, it's a very similar situation, that our layer count has been stable for the last four to six quarters.

And as we look forward, the technology isn't in higher layer counts.

It's more in blind and buried vias and sequential lamination, via-in-pad -- all those technologies that we think will be the future for us.

So layer count is probably going to be pretty stable and not a meaningful point of reference any more.

I think Steve talked about our cost reduction efforts that we've done.

And we have been pretty active on not only controlling costs but also maximizing profit.

And we do that with wise investments where we think there's a good return on our investment, and then we control our costs.

So with the restructuring we did in the first and second quarter plus our ongoing management of the business, we have positioned the company to continue to improve and it's generating nice profits.

So if we get some help from the marketplace, we are extremely well positioned.

So anyway, thank you very much for joining us today, and we look forward to our call in the next quarter.

Thank you.

Ladies and gentlemen, this concludes the TTM Technologies second quarter 2009 financial results conference call.

If you would like to listen to a replay of today's conference, please dial 800-406-7325, or 303-590-3030 with the pass code 4117262.

ATT would like to thank you for your participation, and you may now disconnect.